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The Inside Story of Apple's $14 Billion Tax Bill

“The Maxforce” is the European
Union team that ordered Ireland to collect billions of euros in back
taxes from Apple Inc., rattled the Irish government, and spurred changes
to international tax law. You’d think it might have earned the name by
applying maximum force while investigating alleged financial
shenanigans. It didn’t. It’s just led by a guy named Max.

A European Commission official gave the
nickname to the Task Force on Tax Planning Practices in honor of its
chief, Max Lienemeyer, a lanky, laid-back German attorney who rose to
prominence vetting plans to shore up struggling banks during Europe’s
debt crisis. Since its launch in 2013, the Maxforce has looked at the tax status of hundreds of companies across Europe, including
a deal Starbucks Corp. had in the Netherlands, Fiat Chrysler
Automobiles NV's agreement with Luxembourg, and -- its largest case
-- Apple in Ireland.

Lienemeyer’s team of 15 international civil
servants pursued a three-year investigation stretching from the
corridors of the European Commission, the EU’s executive arm, to
Ireland's Finance Ministry and on to Apple's leafy headquarters in
Cupertino, California. Much of it outlined for the first time here, this
story chronicles a growing clash between Europe and the U.S. and a
shift in the EU’s approach to the tax affairs of multinationals.

The Maxforce concluded that Ireland
allowed Apple to create stateless entities that effectively let it
decide how much -- or how little -- tax it pays. The investigators say
the company channeled profits from dozens of countries through two
Ireland-based units. In a system at least tacitly endorsed by Irish
authorities, earnings were split, with the vast majority attributed to a
“head office” with no employees and no specific home base -- and
therefore liable to no tax on any profits from sales outside Ireland.
The U.S., meanwhile, didn't tax the units because they’re incorporated
in Ireland.

In
August the EU said Ireland had broken European law by giving Apple a
sweetheart deal. It ordered the country to bill the iPhone maker a
record 13 billion euros ($13.9 billion) in back taxes, plus interest,
from 2003 to 2014. One example the Commission cites: In 2011, a unit
called Apple Sales International recorded profits of about 16 billion
euros from sales outside the U.S. But only 50 million euros were
considered taxable in Ireland, leaving 15.95 billion euros of profit
untaxed, the Commission says.

Though the EU says its goal is “to ensure
equal treatment of companies” across Europe, Apple maintains that the
Commission selectively targeted the company. With the ruling, the EU is
“retroactively changing the rules and choosing to disregard decades of
Irish law,” and its investigators don’t understand the differences
between European and U.S. tax systems, Apple said in a Dec. 8 statement.

Apple, which has some 6,000 workers in
Ireland, says its Irish units paid the parent company a licensing fee to
use the intellectual property in its products. The Irish companies
didn't own the IP, so they don’t owe tax on it in Ireland, Apple says,
but the units will face a U.S. tax bill when they repatriate the
profits. Apple expects to pay about 26 percent of its earnings in tax
for the most recent fiscal year and has set aside some $32 billion to
cover taxes it says it will face should overseas income be returned to
the U.S. “This case has never been about how much tax Apple pays, it’s
about where our tax is paid,” the company said. “We pay tax on
everything we earn.”

Ireland on Nov. 9 appealed the Commission’s
ruling at the EU General Court in Luxembourg, arguing it has given Apple
no special treatment. Irish Finance Minister Michael Noonan has said he
“profoundly disagrees” with the ruling and that Ireland strictly
adheres to tax regulations. The government says Ireland has no right to
tax non-resident companies for profits that come from activities outside
the country.

Ireland's finance minister Michael Noonan.

Photographer: Aidan Crawley/Bloomberg

“Look at the small print” on an
iPhone, Noonan said after the EU released its ruling in August. “It says
designed in California, manufactured in China. That means any profits
that accrued didn’t accrue in Ireland, so I can’t see why the tax
liability is in Ireland.”

In the coming weeks, the EU is expected to
publish details of the Maxforce investigation. At about the same time,
Apple will likely lodge its own appeal in the EU court. Though Apple
will have to pay its tax bill within weeks, the money will be held in
escrow, and the issue will probably take years to be resolved.

This story is based on interviews with dozens
of officials from the EU, Ireland, and Apple, though most didn't want to
speak on the record discussing sensitive tax matters. A Maxforce
representative declined to make Lienemeyer available for an interview.
Ireland's Office of Revenue Commissioners (the equivalent of the
American Internal Revenue Service) says it can’t comment on specific
companies.

“Inconsistency and ambiguity” —Tim Cook on the EU investigation

Lienemeyer
began assembling the Maxforce in late spring of 2013 with a mandate of
scrutinizing tax policies across Europe in search of any favoritism.
Direct subsidies or tax breaks to court a specific company are illegal
in the EU to prevent governments aiding national champions. His first
hire -- the person who would oversee the Apple probe -- was Helena
Malikova, a Slovak who had worked at Credit Suisse Group AG in Zurich.
He quickly added Kamila Kaukiel, a Polish financial analyst who had been
at KPMG, and Saskia Hendriks, a former tax policy adviser to the Dutch
government.

As the four initial members began their
investigations, they got a head start from a U.S. Senate probe of the
tax strategies of American multinationals. The Senate’s Permanent
Subcommittee on Investigations said
Apple shifted tens of billions of dollars in profit into stateless
affiliates based in Ireland, where it paid an effective tax rate of less
than 2 percent.

At 9:30 a.m. on May 21, 2013, senators
gathered in Room 106 of the Dirksen Office Building. Included in the
evidence presented that day was a 2004 letter from Tom Connor, an
official at Ireland’s tax authority, to Ernst & Young, Apple’s tax
adviser. Connor’s question: A unit of the tech company hadn’t filed a
tax return; Was it still in business? E&Y responded two days later
that the division was a non-resident holding company with no real sales.
“There is nothing to return from the corporation tax standpoint,”
E&Y wrote. The Senate exhibits didn’t include Connor’s response if
there ever was one.

The Dirksen Senate Office Building in Washington.

Photographer: Andrew Harnik/AP Photo

At
the hearing, Arizona Republican John McCain castigated Apple as “one of
the biggest tax avoiders in America.” Democrat Carl Levin of Michigan
peered over the glasses perched on the tip of his nose and said Apple
uses “offshore tax strategies whose purpose is tax avoidance, pure and
simple.” Crucially, though, Levin told the crowded room that under U.S.
law, there was little the panel could do to force Apple to pay more tax.
Apple Chief Executive Officer Tim Cook passionately defended the
company’s actions, telling the senators “We don’t depend on tax
gimmicks.”

The Senate revelations raised eyebrows at the
Maxforce’s office in Madou Tower, a 1960s high-rise in the rundown
Saint-Josse neighborhood of Brussels. Three weeks after the Senate
hearing, Lienemeyer's team asked Ireland for details of Apple's tax
situation. The Irish tax authorities soon dispatched a representative
carrying a briefcase filled with a bundle of bound pages. The Irish
could have simply sent the material via e-mail, but they were cautious
about sharing taxpayer’s information with the EU and have a ground rule
to avoid leaks: never send such documents electronically.

While the Irish government remained bullish in
its public statements, saying Apple hadn’t received any favors, behind
the scenes tensions were rising. Through the summer of 2013, the Finance
Ministry assured government ministers that the EU investigation would
amount to nothing, according to people familiar with the discussions.
But those assertions seemed less confident than earlier communications.
There was a sense that Apple had worked out its Irish tax position in a
vastly different era, and no one remembered many details of the
negotiations decades earlier.

In 1980, the four-year-old company -- the
Apple III desktop had just been released -- created several Irish
affiliates, each with a different function such as manufacturing or
sales, according to the Senate report. Under Irish laws dating to the
1950s designed to shore up the moribund post-war economy, as a so-called
export company Apple paid no taxes on overseas sales of products made
in Ireland.

Madou Tower in Brussels.

Photographer: Alison Cornford-Matheson/Getty Images

To
comply with European rules, Ireland finally ended its zero-tax policy
in 1990. After that, Apple and Ireland agreed that the profit attributed
to a key Ireland-based unit, the division discussed in Tom Connor’s
letter, be capped using a complex formula that in 1990 would have
resulted in a taxable profit of $30 million to $40 million.

An Apple tax adviser “confessed there was no
scientific basis” for those figures, but that the amounts would be “of
such magnitude that he hoped it would be seen as a bona-fide proposal,”
according to notes from a 1990 meeting with the Irish tax authority
cited by the EU. The equation didn’t change even as Apple began
assembling the bulk of its products in Asia.

Ireland and Apple started to make changes a
few months after the Maxforce began looking into their tax relationship.
In October 2013, Finance Minister Noonan announced he would close the
loophole that let stateless holding companies operate out of Ireland.
The EU said Apple changed the structure of its Irish units in 2015,
which the company says it did to comply with the shift in Irish law.

As the Maxforce stepped up its probe in June
2014, Irish Prime Minister Enda Kenny was wooing potential investors in
California. At a San Francisco event to promote Irish entrepreneurs,
Governor Jerry Brown quipped that he had thought Apple “was a California
company,” but according to tax returns, “they’re really an Irish
company.” News clips show Irish officials looking on stony-faced as the
governor makes his jest.

Enforcement of EU rules on taxation is a matter of “fairness” —EU competition chief, Margrethe Vestager

With
Lienemeyer’s team digging further into the issue, Apple’s concern
deepened. In January 2016, CEO Cook met with Margrethe Vestager, the EU
competition chief -- and Lienemeyer's ultimate boss -- on the 10th-floor
of the Berlaymont building, the institutional headquarters of the
European Commission in Brussels.

European Union competition chief Margrethe Vestager.

Photographer: Jasper Juinen/Bloomberg

Vestager,
a daughter of two Lutheran pastors, has a reputation for being
even-handed but tough, cutting unemployment benefits while advocating
strict new rules for banks when she served as Denmark's finance
minister. While she has acknowledged that her team had little experience
with tax rulings -- in a November interview with France's Society
magazine, she said, “We learned on the job” -- Vestager says enforcement
of EU rules on taxation is a matter of “fairness.”

In the meeting with Cook she quizzed him on
the tax Apple paid in various jurisdictions worldwide. She told the
Apple executives that “someone has to tax you,” according to a person
present at the meeting. In a Jan. 25 follow-up letter obtained by
Bloomberg, Cook thanked Vestager for a “candid and constructive exchange
of views,” and reasserted that Apple’s earnings are “subject to
deferred taxation in the U.S. until those profits are repatriated.”

Subsequent correspondence became more heated.
On March 14, Cook wrote to Vestager that he had “concerns about the
fairness of these proceedings.” The Commission had failed to explain
fully the basis on which Apple was being investigated, and the body's
approach was characterized by “inconsistency and ambiguity,” Cook said.

Apple contended that the EU had backtracked on
a 2014 decision recognizing that its two Irish subsidiaries were not
technically resident in Ireland, and therefore only liable for taxes on
profits derived from Irish sources. Now, Cook said, it seemed the
Commission was intent on “imposing a massive, retroactive tax on Apple
by attributing to the Irish branches all of Apple’s global profits
outside the Americas.”

"There is no inconsistency," an EU
spokesman said in a Dec. 15 statement. Only a fraction of the profits of
the subsidiaries were taxed in Ireland, the statement said. "As a
result, the tax rulings enabled Apple to pay substantially less tax than
other companies, which is illegal under EU state aid rules."

Cook's entreaties did little to sway Vestager,
and in August she phoned Noonan to tell him the results of the Maxforce
investigation: The Commission was going to rule against Ireland. Late
in the afternoon of Aug. 29, Irish officials began hinting to reporters
that Apple’s tax bill amounted to billions and “could be anything.” At
noon the following day, Vestager told a packed press conference in
Brussels that the Commission had decided Apple owed Ireland 13 billion
euros.

Though that would be equivalent to 26 percent of the 2015 national budget, Ireland didn't want
the windfall, saying the ruling was flawed because the country hadn’t
given Apple any special treatment. The decision sparked a political
crisis as left-leaning members of Enda Kenny’s fragile minority
administration saw a potential bonanza for taxpayers that the world’s
richest company could well afford. Even as Noonan toured television
studios vowing to appeal the decision, independent lawmakers demanded
that Ireland take the money.

Facing a potential revolt that could bring
down the government, Kenny and Noonan eventually bowed to demands for a
review of the country’s corporate tax system. But they said they would
fight the case, and on Sept. 7, Irish lawmakers overwhelmingly backed
the motion for an appeal.

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Officials from
Lienemeyer’s team and other EU offices say they have gathered tax
information on about 300 companies, looking for what they deem to be
favorable treatment by governments across Europe. While they don't
expect all of those to yield payoffs as hefty as that from their
investigation of Ireland and Apple, they say a worrying number require
the kind of maximum force that the Maxforce can apply.

"We focus on outliers where you're looking at
something that is off the radar screen," Lienemeyer's boss, 50-year-old
Dutchman Gert-Jan Koopman, who is in charge of state-aid enforcement at
the EU, said at a Brussels conference in November. "If you're paying a
fair amount of tax then there is absolutely nothing to worry about.”

—With assistance from Stephanie Bodoni and Aoife White

(Updates
with tax figures in seventh paragraph, clarifies effective tax rate in
13th, adds line about compliance in 21st. A previous version corrected
fifth paragraph to show 16 billion euro profit was on sales outside the
U.S., not just Europe)

The Inside Story of Apple's $14 Billion Tax Bill
Reviewed by G Geezgos
on
December 17, 2016
Rating: 5